The second major worldwide economic shock in half a decade: too soon?
Global economic conditions have been significantly affected by ongoing geopolitical conflicts and associated trade and sanctions uncertainty. At the beginning of WW1 in 1914 there was a belief that 'it will all be over by Christmas'. The President of the USA announced recently that the USA could finish its war with Iran within two to three weeks. Regardless of the length of the conflict the economic impact of it will be felt for a considerable time to come. The now partial closure of the Strait of Hormuz and the threatened closure of the Bab el-Mandeb Strait between the Red Sea and the Indian Ocean have had an immediate and negative impact on global fuel supplies and prices, supply chains and the world economy.
Relatedly, the Bank of England has warned about risks in the near $2t private credit market being exacerbated by the conflict. There is a possible impact on life insurers that have invested almost half the funds in this market. Investor redemptions are reported to be on the rise.
Locally, inflation is expected to spike, albeit that the RBNZ has not increased the OCR (yet). ASB's economist predicts that the economic recovery will be delayed until 2027. The March ANZ business confidence survey reported plunging business confidence as firms processed the shock of the Iran conflict and soaring fuel costs. BNZ's Mike Jones warns of a stagflationary-type-shock, involving high inflation, high unemployment and stagnant economic growth.
New Zealand sources over 80% of its refined fuel imports from Singapore and South Korea. South Korea, in turn, sources much of its crude supplies from the Middle East. It remains to be seen how the security of the country's fuel supplies (in particular, Jet A1 and diesel) may be affected by the triggering of force majeure clauses in supply contracts. Airlines and transport companies will undoubtedly be affected. Air NZ was already struggling and is now forecasting losses of $500m over the next two years. Flights domestically and internationally have been cancelled.
On the plus side, new EV sales are reported as having skyrocketed since the start of the conflict, increasing 278% year on year.
As some of the world's insolvency professionals gather in London for the annual INSOL conference a guaranteed topic for discussion will be how this dramatic change in the economic outlook will drive an increase in insolvencies and restructurings. Unfortunately, there is certain to be an increase in business failures in New Zealand arising as a result of the conflict.
